Q3FY24 Review: Coforge Ltd: Delivering on guidance in a tough environment

23 Jan 2024 , 02:30 PM

Coforge (COFO) reported Q3 revenue growth of 1.8% cc QoQ (+12% YoY), a tad above IIFLe of 1.2%, as ramp-up of previously won deals offset higher furloughs. At 13.8% (+190bps QoQ), Ebit margin was slightly below IIFLe of 14.2%, due to higher furloughs and continued SG&A investments. COFO announced healthy deal wins of USD354mn (+18% TTM YoY) including three large deals, and USD974mn of order book executable in the next 12 months (+16% YoY). COFO reiterated that it would come closer to the lower end of the 13-16% cc YoY revenue growth guidance for FY24, on the back of healthy bookings. The overall demand environment continues to be soft, as per the mgmt. Flat Adj. Ebitda margin guidance for FY24 was also maintained; implying 4Q growth to be better than Q3 and margins to expand by 150-200bps QoQ. Analysts of IIFL Capital Services modestly tweak their FY24-26 EPS estimates and their 12m TP increases to Rs6,500 (was Rs6,400), pegged at 28X 2YF P/E. BUY. 

Growth steady, despite higher-than-anticipated furloughs: 

COFO’s growth in Q3 was driven by BFS (+3% QoQ) and Others (+4.1%) verticals, while Insurance (-1.6%) and Travel (-2.7%) were soft. Management indicated seeing higher-than-anticipated furloughs in the quarter and the demand environment remains depressed. COFO signed three large deals in the quarter, taking the total large deal YTD to eight. Executable orders in the next 12 months increased to USD974mn (+16% YoY) — this equals 80% of analysts of IIFL Capital Services next 12 months revenue estimate. 

Margins rebound on ESOP cost normalisation: 

Ebit margin increased to 13.8% (+190bps QoQ), as normalisation of ESOP costs (+160bps QoQ) and operational efficiencies, were partly offset by higher furloughs and SG&A investments. Adj. Ebitda margins expanded by 40bps; management reiterated flat YoY Ebitda margin guidance for FY24. COFO continues to expect further Ebitda margin improvement in FY25, driven by operating leverage, offshoring and optimisation of the average resource cost. Sequential headcount was flat, on the back of 1,400 net additions in H1.

Maintain BUY: 

COFO is trading at 33x/27x FY25ii/FY26ii P/E, in line with the average Mid-cap peers. Analysts of IIFL Capital Services maintain BUY, and see COFO as one of the top quartile growth company in their coverage even if valuations are stretched. Key risks: Supply-side.